Sap India Private Limited, Bangalore V. Commissioner Income Tax (A) Bangalore-6, Bangalore

ITA 683/BANG/2017

• Counselvise Citation: [2021] 104 COUNSELVISE.COM (IT) 8465 (ITAT-BANGALORE)
• Duration Of Justice: 4 year(s) 7 month(s) 23 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 15-11-2021
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: A
• Assessment Year: 2009-2010
• Appeal Filed On: 23-03-2017
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Question of law; Bad and doubtful debts; TDS
• Section: 43B; 143(3); 40(a)(ia); 80IB; 194C; 192; 64; 43; 13

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL “A” BENCH : BANGALORE BEFORE SHRI N.V. VASUDEVAN, VICE PRESIDENTAND SHRI B. R. BASKARAN, ACCOUNTANT MEMBER ITA Nos.682, 683/Bang/2017 Assessment Years: 2009-10, 2010-11 M/s. SAP India Pvt. Ltd., 6 th Floor, RMZ Ecoworld, Plot C1, 8A Campus, Sarjapur – Marathahalli Outer Ring Road, Devarabeesanahalli, Bengaluru – 560 103. PAN : AACCS 7438 E Vs. The Commissioner of Income Tax (Appeals), Bengaluru – 560 006. Assessee by :Shri.Chavali Narayan, CA Revenue by:Shri.Sumer Singh Meena, CIT(DR)(OSD)(ITAT), Bengaluru Date of hearing:15.11.2021 Date of Pronouncement:16.11.2021 O R D E R Per N. V. Vasudevan, Vice President ITA No.682/Bang/2017is an appeal by the assessee against the order dated 26.12.2016 of CIT(A)-6, Bengaluru, relating to Assessment Year 2010-11 while ITA No.683/Bang/2017 is an appeal by the assessee against the order dated 27.12.2016 of CIT(A)-6, Bengaluru, relating to Assessment Year 2009-10. 2.ITA No.682/Bang/2017 :The assessee had raised 2 grounds before the Tribunal but at the time of hearing, did not press for adjudication of ground No.2. Hence, the said ground is dismissed as not pressed. Ground No.1 which requires adjudication by the Tribunal reads as follows: ITA Nos.682, 683/Bang/2017 Page 2 of 17 1. Bad debts written off a. Based on the facts and circumstances of the case, the Appellant respectfully submits that the learned CIT(A) has erred. on law. and on facts, in disallowing certain bad debts written off by the Appellant in respect of revenues pertaining to the financial year 2009-2010. amounting to Rs 81,26,232. 3. The assessee is a company engaged in the business of software maintenance after sales support services, customization of SAP software, etc. In the course of assessment proceedings under section 143(3) of the Income Tax Act, 1961 (hereinafter called ‘the Act’) for Assessment Year 2010-11, the AO noticed that the assessee had claimed deduction of a sum of Rs.97,68,26,037/- as bad debts written off. The AO did not dispute the fact that the amounts that were claimed as bad debts were written off had been booked as sales and maintenance charges for the Financial Year 2009-10 (Assessment Year 2010-11). He noticed that some of the outstandings have been written off as bad debts in the very same year. The AO has given the details of some of the debts that have been written off to the tune of about Rs.8,12,36,232/-. He found that the sums which were written off as bad debts were due from reputed companies like Infosys Ltd., Wipro Ltd., and TCS Ltd. The AO therefore called upon the assessee to explain the exact nature of transactions with the parties, the exact reasons for treating the debts as bad debts and irrecoverable. According to the AO, the assessee did not give any specific reasons and therefore the AO came to the conclusions that the writing of debts as bad debts was arbitrary. The AO also held that even after the amendments to the provisions to section 36(1)(vii) of the Act w.e.f. 01.04.1989, the assessee cannot simply write off debts as bad and claim the same as deduction and that the assessee is required to prove bonafide in respect of claiming huge amounts as bad debts. The AO also made a reference to the decision of the Hon’ble Supreme Court in the case of TRF Ltd., Vs. CIT 323 ITR 397 wherein the Hon’ble Supreme Court held that it is enough if the debts are written off as bad and irrecoverable in the books of the assesee by making accounting entries ITA Nos.682, 683/Bang/2017 Page 3 of 17 and it is not necessary for the assessee to establish that the debts have become bad. According to the AO in the aforesaid decision, the Hon’ble Supreme Court did not have any occasion to examine whether the decision to write off a debt as bad debt was a bonafide decision. The AO therefore refused to allow the claim of the assessee for deduction of debts written off as bad to the extent of Rs.8,12,36,232/- in respect of 43 parties listed out in the order of assessment. On appeal by the assessee, the CIT(A) confirmed the order of the AO. Hence, this appeal by the assessee before the Tribunal. 4. We have heard the rival submissions. The Hon’ble Supreme Court in the case of TRF Ltd., (supra) has laid down the law with regard to claiming deduction on account of bad debts written off. For the sake of clarity, we re-produce hereinbelow provisions of Section 36(1)(vii) of the Act, both prior to 1st April, 1989 and post-1st April, 1989:- “Pre-1st April, 1989: Other deductions. 36.(1) The deductions provided for in the following clauses shall be allowed in respect of the matters dealt with therein, in computing the income referred to in section 28-- (i) to (vi) xxxx (vii) subject to the provisions of sub-section (2), the amount of any debt, or part thereof, which is established to have become a bad debt in the previous year. Post-1st April, 1989: Other deductions. 36.(1) The deductions provided for in the following clauses shall be allowed in respect of the matters dealt with therein, in computing the income referred to in section 28-- (i) to (vi) xxxx xxxx xxxx ITA Nos.682, 683/Bang/2017 Page 4 of 17 (vii) subject to the provisions of sub-section (2), the amount of any bad debt or part thereof which is written off as irrecoverable in the accounts of the assessee for the previous year." 5. In the CBDT Circular No.551 dated 23-01-1990 (1990) 183 ITR St. 37, the provisions of Section 36(1)(vii) was explained post the amendment brought vide Direct Tax laws (Amendment)Act, 1987. The circular reads as under :- “Amendments to sections 36(1)(vii) and 36(2) to rationalise provisions regarding allowability of bad debts- The old provisions of clause (vii) of sub-section (1) read with subsection (2) of the section laid down conditions necessary for allowability of bad debt. It was provided that the debt must be established to have become bad in the previous year. This led to enormous litigation on the question of allowability of bad debt in a particular year, because the bad debt was not necessarily allowed by the Assessing Officer in the year in which the same had been written off on the ground that the debt was not established to have become bad in that year. In order to eliminate the disputes in the matter of determining the year in which a bad debt can be allowed and also to rationalise the provisions, the Amending Act, 1987 has amended clause (vii) of subsection (1) and clause (i) of sub-section (2) of the section to provide that the claim for the bad debt will be allowed in the year in which such a bad debt has been written off as irrecoverable in the accounts of the assessee.” 6. It is thus clear that the deduction on account of bad debt as allowed u/s 36(l)(vii) read with section 36(2), after amendment by the Direct Tax Laws (Amendment) Act 1987, envisage merely wiring off the debt as irrecoverable in the accounts of the assessee as a condition for such an allowance. Before the amendment by the DTL (Amendment) Act 1987, of course, there was a condition to establish that the debt has become bad. The Hon'ble Supreme Court in the case of T.R.F. Limited vs C.I.T reported in 323 ITR 397(SC) has clearly observed that after 01.04.1989, it is not necessary for the assessee to establish that the debt, in fact, has become irrecoverable. It is enough if the bad debt is written off as irrecoverable in the accounts of the assessee. ITA Nos.682, 683/Bang/2017 Page 5 of 17 7. The CIT(A) in the impugned order has placed reliance on the decision of Bangalore Bench of the Tribunal in the case of Embassy Classic P. Ltd. Vs. ACIT 20 taxmann.com 291. In the aforesaid case, the facts were that, there was a search action in the case of the assessee along with a simultaneous search in the case of one Shri. K. M. Viswanath and Smt. K. M. Parvathamma. In the light of the materials and information collected in the course of search, the assessee was asked to file returns. In such returns filed by the assessee, it claimed deduction by way of bad debts to the tune of Rs.3.67 Crores. The assessee explained that as against the sales consideration of Rs.8,60,69,500/- the buyers had paid an amount of Rs.4,93,97,650/- and a cheque for Rs.4 crores was issued for the balance consideration. According to the assessee, the cheque so received from Shri. K. M. Viswanath and Smt. K. M. Parvathamma bounced on presentation before its bankers and the assessee was unable to realize the aforesaid sum. According to the assessee company, certain legal proceedings were also initiated against the defaulters. As on the date of the finalization of the balance-sheet, the realization of the balance money was doubtful and the assessee took a decision to write off the amounts as bad debts. Accordingly, the assessee company wrote-off a sum of Rs.3,66,71,850/- as bad debts on account of Shri. K. M. Viswanath and Smt. K. M. Parvathamma. The Tribunal found that the sum written off as bad debt was in fact realized by the Assessee before the date of filing of return of income and hence the tribunal did not allow the claim of the Assessee for deduction, observing as follows:- “Even though writing off a debt as bad and doubtful may be a sufficient mode of discharging the proof, the said format of statutory evidence is not an empty formality. It is not necessary for the assessee to prove that the debt has become bad. But at the same time, the assessee cannot convert any live amount into a bad debt only on the basis of the technical rule of writing off. In the present case, even though the amount was not received on the balance-sheet date, the amount was received by the assessee before filing of the return itself. In fact, the balance consideration of the sale transaction covered by the dishonour of the cheque was received by the assessee company on 30.08,2005. The assessee had filed the return of income only thereafter on 29.10.2005. Therefore, it is ITA Nos.682, 683/Bang/2017 Page 6 of 17 very clear that www.taxpundit.org www.taxpundit.org www.taxpundit.org www.taxpundit.org Page 4 of 7 www.taxpundit.org www.taxpundit.org when the return of income was filed by the assessee, no debt was recoverable from the buyers of the property. We find a lot of force in the argument of the learned Commissioner of Income-tax regarding the non-committal of the assessee company in pursuing the legal remedies available before it for the recovery of the amount. Therefore, in these circumstances, we do not find that the debt has become bad debt. It was only a case of delayed payment. Therefore, we find that the judgement of the Hon'ble Supreme Court in the case of T R F Ltd., does not apply to the facts of the present case. In short, we find that the Commissioner of Income-tax(A) has rightly confirmed the disallowance of Rs.3,66,71,850/-. 8. It is thus clear that the facts of the case in the case of Embassy classic (supra) are distinguishable from the facts of the Assessee’s case because in the case cited, the assessee had written off bad debts in the books of account. However, the amount was recovered by the assessee before filing of the return itself. Thus, at the time of filing of return of income, no debt was due. The Tribunal observed that the assessee cannot convert any live amount into a bad debt only on the basis of the technical rule of writing off. It was not a case of bad debt but a case of delayed payment. It was in backdrop of these facts the Tribunal held, that the judgment of Hon’ble Supreme Court of India in the case of TRF Limited Vs. CIT (supra) will not apply. We find that the facts in the present case are entirely at variance. Therefore, the decision of Bangalore Bench of the Tribunal in the case of Embassy Classic P. Ltd. Vs. ACIT (supra) will have no application in the facts and circumstances of the present case. For the above reasons, we are of the view that the assessee is entitled to claim deduction on account of bad debts and the AO is directed to allow claim of assessee. The decision taken by the Revenue authorities in this regard are directly contrary to the decision of the Hon’ble Supreme Court. We are therefore of the view that the addition made by the Revenue authorities cannot be sustained and the same is directed to be deleted. ITA Nos.682, 683/Bang/2017 Page 7 of 17 9. ITA No. 683/Bang/2017 (AY 2009-10): As far as this appeal for Assessment Year 2009-10 is concerned, the assessee has raised 3 grounds of appeal out of which ground No.3 was not pressed. Ground No.2 is in relation to bad debt written off and is identical to grounds raised by the assessee in Assessment Year 2010-11 for the reasons stated while deciding the appeal for Assessment Year 2010-11, We allow ground No.2 raised by the assessee. 10. The only other ground that remains for adjudication is ground No.1 raised by the assessee which reads as follows: 1 Deduction under Section 80-IC of the Act a Based on the facts and circumstances of the case, the Appellant respectfully submits that the learned CIT(A) has erred. in law, and in facts. in not allowing deduction under Section 80-IC of the Act in respect of the amount added back under Section 40(a)(ia) of the Act. amounting to Rs 116.508.888 for the 80-IC unit. b. Based on the facts and circumstances of the case. the Appellant respectfully submits that the learned CIT(A) has erred. in law, and in facts. in not allowing deduction under Section 80-IC of the Act after considering the reversal of commission expenses, amounting to Rs 42.250 009. 11. As far as this ground is concerned, the facts are that As per the return of income filed by the assessee, the profits of the 80-IC unit was claimed at Rs.2,44,63,386/- as per Act. Further after making adjustments as per Income- tax Act, the profits of 80-IC unit has been recomputed at Rs.42,77,77,145/- and deduction claimed on the said sum u/s.80-IC of the Act. On examination of the claim, the AO found that the assessee has disallowed a sum of Rs.11,65,08,868/- on account of non-deduction of TDS by invoking the provisions of section 40(a)(ia). The AO was of the view that the claim of the ITA Nos.682, 683/Bang/2017 Page 8 of 17 assessee cannot be allowed on the enhanced income after disallowance under section 40(a)(ia) of the Act, for the following reasons: i.It is an admitted fact that the assessee has not deducted tax at source in respect of payments made to the tune of Rs.11,65,08,888/- and the said amount has been added back u/s 40(a)(ia). Accordingly, there is an increase in income of the assessee to the tune of Rs.11,65,08,888/-under 80-IC unit. ii.Section 40(a)(ia) is a deeming provision by virtue of which assessee is not entitled to claim certain deductions though incurred in the relevant previous year on the basis of method of accounting followed, but due to failure on his part in deducting tax at source. As such, the increase in the business income of the assessee on account of such disallowance is notional in nature without having any real inflow or accrual of income to that extent. iii. The intention of the legislature in introducing provisions of section 40(a)(ia) is to penalize the assessees who failed to follow the TDS provisions scrupulously, where TDS being one of the major sources of revenue, i.e., 40-42% of the total Direct Tax revenue comes through TDS provisions. As such, the purpose of disallowance u/s 40(a)(ia) is to make the assessee aware that he should face multiple consequenceson account of non-deduction of tax including levy of demand u/s 201(1), interest u/s 201(1A) and penalty u/s 221(1), and force him to abide by the TDS provisions. iii.The disallowance of certain expenditure made u/s 40(a)(ia) as a measure of punishment / penalty cannot give rise to benefit to the assessee by way of claiming deduction u/s 10A on such amount disallowed. Otherwise, it would lead to an absurd situation wherein, even after disallowance of huge amount for non-deduction of TDS, the assessee will not pay any tax or penalty by virtue of claiming deduction u/s 10A. As such, the real intention of the legislature by way of introducing section 40(a)(ia) will be defeated in case the assessee is entitled to claim deduction u/s WA on the same amount and thereby go scot-free without paying any tax or penalty on such disallowance. ITA Nos.682, 683/Bang/2017 Page 9 of 17 12. In coming to the above conclusions, the AO placed reliance on the decision of the Hon'ble ITAT, Ahmedabad Bench 'C, in the case of DC1T, Circle-2(2) Vs. Ramesh 8hai C. Prajapathi (29 Taxmann.com 64) wherein it is held that amount disallowed u/s 40(a)(ia) cannot be taken into account to determine profits of business for the purpose of computing deduction u/s 80IB. 13. The AO further noticed from the computation of income eligible for deduction under 80-IC unit, that the Assessee had disallowed a sum of Rs.58,53,925/- with a narration: "unpaid Karnataka Sales Tax u/s 43-B". Thus the deduction u/s.80-IC of the Act was claimed on the sum as enhanced by unpaid sales tax liability. The AO noted that the 80-IC unit was located in the State of Uttarakhand and it has no nexus with Karnataka State Sales Tax. The AO therefore called upon the assessee to furnish the details of the nature of expenses debited under 80-IC unit along with evidence for inclusion of the said amount on the debit side of the Profit & Loss account of 80-IC Unit. According to the AO, the Assessee did not furnish any information. The AO therefore presumed that that the assessee had debited the above expenditure towards Karnataka State Sales tax in respect of its business activities carried out at Bangalore, i.e., under non-STPI unit, which is engaged in domestic software implementation and related training services. Accordingly, assessee's claim of deduction u/s 80-IC to the extent of Rs.58,53,925/- was disallowed. 14. Similarly the assessee has credited a sum of Rs.4,22,50,009/- to the 80-IC unit under the head commission and increased the profit to that extent. In this regard, the assessee was asked to explain the details of the commission income received under 80-IC unit. Also the assessee was asked to give the details of commission expenses debited which have been written back if any. ITA Nos.682, 683/Bang/2017 Page 10 of 17 However, even after availing adequate opportunities the assessee has failed to furnish the requisite details. In view of this, the AO was of the opinion that the assessee has not received any commission income under 80-IC Unit as the unit is engaged in manufacture of SAP CDs, rather than in the business of commission agency. Further, it cannot be construed that the assessee might have written back commission expenses claimed earlier under 80-IC unit which is no longer required inasmuch as, the 80-IC Unit was started only in the F.Y. 2008-09 relevant to the assessment year under reference. The AO also found that as per the details and financials furnished by the assessee in respect of 80-IC unit, there was no debit of any amount under commission expenses. 15. Under the above circumstances, AO came to the conclusion that the commission expenses written back pertains to non-80-IC/non-10A unit which has been wrongly claimed under the 80-IC unit to shift the income from taxable units to non taxable 80-IC unit. Accordingly, the deduction claimed by the assessee under 80-1C in respect of the commission amount of Rs. 4,22,50,009/- was disallowed. 16. The AO also observed in his order that during the course of assessment proceedings, the assessee was asked to furnish unit-wise books of account maintained by the assessee along with evidences in support of various items of expenses debited under each unit. However, even after availing adequate opportunities, the assessee did not furnish the requisite information. The AO also observed that the assessee has even failed to furnish the computation of total income as per the provisions of the Act in respect of each unit separately. After availing repeated opportunities also, the AR did produce working only in respect of 2 tax-exempt units, 10A unit at Bangalore and 80- IC unit at Dehradun. According to the AO therefore it was very difficult to ITA Nos.682, 683/Bang/2017 Page 11 of 17 arrive at the income of various units as per the provisions of the Act. In this background, the AO held that the following three components which have been added back to the total income under 80-IC unit would not be entitled to deduction. Accordingly, disallowance made u/s 80-IC unit was worked out as under: 17. Thus, the deduction u/s.80-IC of the Act was allowed at Rs.26,31,64,323/- as against the claim of the Assessee for the said deduction at a sum of Rs.42,77,77,145/-. 18. On appeal by the assessee, the CIT(A) confirmed the order of the OA. With regard to deduction under section 80-IC of the Act on a sum of Rs.11,65,08,888/-. The said sum represented disallowance due to non-deduction of tax at source pertaining to expenses claimed in respect of 80-IC unit. According to the CIT(A), the income of 80-IC unit which gets enhanced consequent to the disallowance under section 40(a)(ia) of the Act will not be eligible for deduction under section 80-IC of the Act. In coming to the aforesaid conclusion, the AO relied on the decision of the ITAT, Ahmedabad Bench, in the case of Ramesh Prajapathi 29 taxmann.com 64 (Ahmedabad – Tribunal). With ITA Nos.682, 683/Bang/2017 Page 12 of 17 reference to the disallowance of deduction on unpaid Karnataka Sales Tax and Commission amount of Rs.4,22,50,009/- under sections 43B and 40(a)(ia) of the Act respectively while allowing deduction under section 80-IC of the Act, the CIT(A) came to a finding that the assessee did not produce any evidence to show that these expenses related to 80-IC unit on which deduction was claimed. 19. Aggrieved by the order of the CIT(A), assessee is in appeal before the Tribunal. We have heard the rival submissions. The learned counsel for the assessee submitted that with regard to the sum of Rs.11,65,08,888/-, the AO has disallowed the expenses under Section 40(a)(ia) of the Act, and the business profits eligible for deduction under Section 80-IC of the Act has not been increased by the expenses disallowed under Section 40(a)(ia) of the Act. Accordingly the learned Assessing Officer has to compute deduction under Section 8010 of the Act on such increased amount. He relied on certain judicial pronouncements in this regard. The learned DR relied on the order of the CIT(A). 20. We have heard the rival submissions. There is no dispute regarding genuineness of the expenditure that was disallowed and the fact that the said expenditure is otherwise allowable as deduction in computing income from business. In such circumstances, even if the expenditure is disallowed u/s.40(a)(i) of the Act, the result will be that the disallowance will go to increase the profits of the business which is eligible for deduction u/s.80-IC of the Act and consequently the deduction u/s. 80-IC of the Act should be allowed on such enhanced profit consequent to disallowance u/s. 40(a)(i) of the Act. In this regard, we find that two High Courts viz., Hon'ble Bombay High Court in the case of CIT v. Gem Plus Jewellery India Ltd. (2010) 194 Taxman 192 (Born) and Hon'ble Gujarat High Court in the case of ITO vs. Kewal Construction, 354 ITR 13 (Gui) have taken the view that when ITA Nos.682, 683/Bang/2017 Page 13 of 17 disallowance u/s. 40(a)(ia) of the Act goes to enhance the profits that are eligible for deduction under Chapter VIA of the Act, the deduction under Chapter VIA should be allowed on such increased profit. This position has also been now confirmed by the CBDT in its Circular No.37/2016 dated 02.11.2016 wherein the Board has observed as follows:- “3. In view of the above, the Board has accepted the settled position that the disallowances made under sections 32, 40(a)(ia), 40A(3), 43B, etc. of the Act and other specific disallowances, related to the business activity against which the Chapter VI-A deduction has been claimed, result in enhancement of the profits of the eligible business and that deduction under Chapter VI-A is admissible on the profits so enhanced by the disallowance”. 21. Further the Hon’ble Karnataka in the case of CIT Vs. M/s. M.Pact Technology Services Pvt. Ltd. in ITA No.228/2013 order dated 11.7.2018 had to deal with admissibility of the following substantial question of law in an appeal by the Revenue u/s.260A of the Act :- “5. Whether the Tribunal is correct in law in not adjudicating the main issue of applicability of provisions of section 40(a)(ia) in respect of disallowance of sub-contracting chares of RS.16,21,851/- made by assessing authority on the ground that the assessee had failed to deduct tax at source under section 194C of I.T. Act? 6. Whether the Tribunal is justified in law in directing the assessing authority to allow deduction under section 10A in respect of amount disallowed under section 40(a)(ia) without appreciating the fact that the income enhanced on account of deeming provisions cannot be considered for the purpose of claiming benefit under the provisions of section 10A?” 22. The Hon’ble Karnataka High Court held as follows: “5. In so far as the substantial question of law Nos.5 and 6 are concerned, learned counsel for the Revenue submitted that the ITAT in its Order dated 21.12.2012 has recorded the findings, the relevant portion of which is extracted below for ready reference:- ITA Nos.682, 683/Bang/2017 Page 14 of 17 14. Having heard both the parties and having considered their rival contentions, we find that the disallowance u/s 40a (ia) is to be made of the expenses incurred and claimed by the assessee but before the payment of which, the assessee has failed to deduct tax at source. The genuineness of the expenditure is not in dispute. The dispute is whether TDS was to be made before making the payment. Without going into the nature of the transaction, we are inclined to accept the alternate plea of the assessee that the disallowance of the expenditure would automatically enhance the taxable income of the assessee and the assessee is eligible for the deduction u/s 10A of the Income-tax Act on the enhanced income. Thus, this ground of appeal is allowed”. 6. The relevant portion of the Circular No.37/2016 dated 02.11.2016 issued by the Central Board of Direct Taxes, Department of Revenue, Ministry of Finance, Government of India, relating to the subject: Chapter VI-A deduction on enhanced profits, is quoted hereunder: “The issue of the claim of higher education on the enhanced profits has been a contentious one. However, the courts have generally held that if the expenditure disallowed is related to the business activity against which the Chapter VI-A deduction has been claimed, the deduction needs to be allowed on the enhanced profits. Some illustrative cases upholding this view are as follows: [i] If an expenditure incurred by assessee for the purpose of developing a housing project was not allowable on account of non-deduction of TDS under law, such disallowance would ultimately increase assessee’s profits from business of developing housing project. The ultimate profits of assessee after adjusting disallowance under section 40[a][ia] of the Act would qualify for deduction under section 80IB of the Act. This view was taken by the courts in the following cases: [a] Income-tax Officer-Ward 5[1] vs. Keval Construction, Tax Appeal No.443 of 2012, December 10 2012, Gujarat High Court [b] Commissioner of Income-tax-IV, Nagpur vs. Sunil Vishwambharnath Tiwari, IT Appeal No.2 of 2011, September 11 2015, Bombay High Court [ii] If deduction under section 40A[3] of the Act is not allowed, the same would have to be added to the profits of the undertaking on which the assessee would be entitled for deduction under section 80-IB of the Act.” ITA Nos.682, 683/Bang/2017 Page 15 of 17 7. Applying the same analogy, it can be held that if deduction u/s. 40[a][ia] of the Act is not allowed, the same would have been to be added to the profits of the undertaking on which the Assessee would be entitled for deduction u/s. 10A of the Act. This view is fortified by the decision of Bombay High Court in the case of ‘Commissioner of Income Tax v. Gem Plus Jewellery India Ltd.,’ [2011] 330 ITR 175 [Bom], wherein it is held thus: “13. By reason of the judgment of the Supreme Court in Commissioner of Income Tax v. Alom Extrusions Limited [2009] 319 ITR 306 the employer's contribution was liable to be allowed, since it was deposited by the due date for the filing of the return. The peculiar position, however, as it obtains in the present case arises out of the fact that the disallowance which was effected by the Assessing Officer has not, the Court is informed, been challenged by the assessee. As a matter of fact the question of law which is formulated by the Revenue proceeds on the basis that the assessed income was enhanced due to the disallowance of the employer's as well as the employees' contribution towards Provident Fund /ESIC and the only question which is canvassed on behalf of the Revenue is whether on that basis the Tribunal was justified in directing the Assessing Officer to grant the exemption under Section 10A. On this position, in the present case it cannot be disputed that the net consequence of the disallowance of the employer's and the employee's contribution is that the business profits have to that extent been enhanced. There was, as we have already noted, an add back by the Assessing Officer to the income. All profits of the unit of the assessee have been derived from manufacturing activity. The salaries paid by the assessee, it has not been disputed, relate to the manufacturing activity. The disallowance of the Provident Fund/ESIC payments has been made because of the statutory provisions - Section 43B in the case of the employer's contribution and Section 36(v) read with Section 2(24)(x) in the case of the employee's contribution which has been deemed to be the income of the assessee. The plain consequence of the disallowance and the add back that has been made by the Assessing Officer is an increase in the business profits of the assessee. The contention of the Revenue that in computing the deduction under Section 10A the addition made on account of the disallowance of the Provident Fund / ESIC payments ought to be ignored cannot be accepted. No statutory provision to that effect having been made, the plain consequence of the disallowance made by the Assessing Officer must follow. The second question shall accordingly stand answered against the Revenue and in favour of the assessee.” ITA Nos.682, 683/Bang/2017 Page 16 of 17 23. In view of the aforesaid decisions and the CBDT Circular No.37/2020, we hold that the revenue authorities erred in not allowing deduction u/s.80-IC of the Act on a sum of Rs.11,65,08,888/-. The claim of the assessee in this regard is accepted and the AO is directed the give necessary relief to the assessee in this regard. 24. As far as the claim for deduction under section 80-IC of the Act on reversal of commission expenses of Rs.4,22,50,009/- is concerned, the finding of the AO and the CIT(A) is that the assessee failed to produce evidence or explanation as to how the amount of commission was disallowed towards the unit claiming deduction u/s.80-IC of the Act. This finding has not been rebutted by the assessee in the proceedings before the Tribunal also. Therefore Grd.No.1 b raised by the assessee is dismissed. 25. In the result, both the appeals of the assessee are partly allowed. Pronounced in the open court on the date mentioned on the caption page. Sd/- Sd/- Bangalore. Dated: 16.11.2021. /NS/* (B. R. BASKARAN) (N. V. VASUDEVAN) Accountant MemberVice President ITA Nos.682, 683/Bang/2017 Page 17 of 17 Copy to: 1.Appellants2.Respondent 3.CIT4.CIT(A) 5.DR6.Guard file By order Assistant Registrar, ITAT, Bangalore.